A lot of fingers have been pointed in trying to figure who’s to blame for the subprime mortgage market meltdown and subsequent credit crunch. Unscrupulous lenders, uneducated borrowers and the Federal Reserve Board are a few of the potential culprits that keep getting mentioned. But Dr. E. Ted Prince, founder and CEO of the Perth Leadership Institute, suggests that at least part of the blame rests not with a “who,” but with a “what.”
Specifically, Prince believes most of the large, Wall Street-based financial firms are going through hard times now because of an inadequate approach to leadership.
“They’re all in a mess right now,” he said. “They don’t know what’s hit them – they’re like a deer stuck in headlights. I think what’s happened is that they were focused on hiring people who were financially literate, not people who had business acumen. There was no model of leadership [in those organizations] to describe business acumen.”
Prince maintains that the distinction between financial literacy and business acumen is important. While the two are related, the first has more to do with knowledge and the second is more of a character trait. At the Perth Leadership Institute, business acumen is defined by two dimensions: the inclination to use resources and the propensity to add value to products and services.
“Your propensity to add value will result with you having an impact on gross margins, and your propensity to use resources will have an impact on indirect expenses,” Prince explained. “If your propensity to add value is high, you’ll have high gross margins relative to your competitors. If your propensity to use resources is high, you’ll spend a lot of money. The idea is to have someone who has a high propensity to add value and a low propensity to use resources.
“This is a behavioral issue,” he added. “You may know these things, but it doesn’t mean you’ll act in that way. Statistically, most people use a lot of resources and have a low propensity to add value. If that weren’t the case, we’d all be innovators and we’d all be frugal. In other words, they have low business acumen. We find in our testing that only 15 percent [of participants] have enough business acumen to consistently make money.”
Another problem with most organizations’ leadership philosophies is that they’ve focused on the cultural, psychological and anthropological aspects at the expense of the business side of this critical skill.
“Clearly, you need people with good interpersonal skills, good vision and so on in leadership roles, but that doesn’t always mean they’ll make money for you,” Prince said.
What can learning professionals do about this problem? First and foremost, they can formally assess personnel for proficiency in business acumen the same way they do for other leadership attributes.
“There hasn’t been a method for measuring this,” Prince said. “You’ve got to start putting in development programs to address the fact that most people will have low business acumen. And you can’t confuse it with financial literacy – what you know doesn’t always affect how you behave.”
They should be careful about how they evaluate this characteristic in employees, Prince said. Because it isn’t always properly understood (or understood at all), it can be tricky. For example, although theoretical exercises such as case studies or simulations might seem like good indicators of how people will perform on the job, they can’t always determine people’s behavior in real life.
“We’ve all got unconscious traits that will lead us in directions we don’t understand,” he said. “Our behavior can take over.”